A group of five U.S. senators are calling on bank regulators to halt the practice by some big banks of issuing high-interest, short-term “payday” loans, described by the lawmakers as a type of “predator product.”
In a letter this week to regulators, Sen. Richard Blumenthal, D-Connecticut, called for a halt to the “unsafe and unsound practice” of bank payday loans. He was joined by senators Richard J. Durbin, D-Illinois; Charles E. Schumer, D-New York; Sherrod Brown, D-Ohio; and Tom Udall, D-New Mexico.
“These bank payday loans are widely recognized as predatory products designed to trap low-income consumers in a cycle of debt. I urge our federal regulators to follow the lead of states like Connecticut in halting this unsound banking practice and putting an end to these abusive loans once and for all,” Blumenthal wrote.
The letter was addressed to Federal Reserve Chairman Ben S. Bernanke, Federal Deposit Insurance Corporation Chairman Martin Gruenberg and Comptroller of the Currency Thomas J. Curry,
Bank “payday loans” are illegal in 14 states, including Connecticut. They cannot be offered to U.S. military personnel. However, a number of banks have recently begun to offer loans with characteristics that make them closely akin to non-bank payday loans, the lawmakers said.
Banks will advance a customer’s pay for a fee, ranging from $7.50 to $10 for every $100 borrowed – for customers with direct deposit of wages and benefits.
The bank deposits the loan directly into the customer’s checking account, then automatically repays itself the loan, plus a fee. If deposits are not sufficient to repay the loan within 35 days, the bank repays itself anyway, potentially leading to overdraft fees.
“As a result, payday borrowers often find themselves in cycles of debt, remaining in that cycle for an average of 175 days per year,” the senators wrote.
The typical bank payday borrower will take out 16 payday loans over the course of the year, with some taking out as many as 20 to 30 loans in a single year.
“We urge you to take meaningful regulatory action that ensures that no bank, regardless of its prudential regulator, structures loans in a way that traps its customers in a cycle of high cost debt,” the letter states.
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